Why Energy Storage Investors Must Understand Resource Constraints

John Petersen

This Saturday marks the second anniversary of my blog, which began with
an article titled Lithium-ion
Batteries
and
Centerfolds. Over time my archive
has grown to 142 articles on energy storage devices, the companies
that make them and their crucial role as enabling technologies for
wind and solar power, transportation and the smart grid. While
cleantech bloggers usually focus on new technologies that might be
game-changers, I'd rather focus on major enhancements to proven
technologies from established industry leaders. The reason is simple,
hot new technologies have limited investment value if the world can't
produce enough raw
materials to implement them.

Last month I spoke at the Ecologic
Institute's
Smart
Energy Dialogue in Berlin. Since most people have
a hard time internalizing immense numbers like a trillion dollar budget
deficit, I used the following table to summarize global mineral
production in 2009 and translate the huge numbers to more digestible
per capita figures.

Natural

Annual
Production

Per

Resource

(Metric Tons)

Capita

Crude Oil

4,189,210,000

616 kg

Raw Steel

1,100,000,000

162 kg

Aluminum

36,900,000

5.4 kg

Copper

15,800,000

2.3 kg

Lead

3,900,000

1.6 kg

Nickel

1,430,000

570 g

Cobalt

62,000

201 g

Uranium

42,700

6 g

Lanthanum

32,900

5 g

Silver

21,400

3 g

Neodymium

19,100

3 g

Lithium

18,000

3 g

This is
scary stuff for baby boomers like me who grew up thinking surplus and
plenty were god-given rights and part of the natural order. Production
of minor metals can be increased with enough time, effort and
investment. Significantly increasing global production of core
industrial
metals is a different story altogether.

If you're reading this blog, you used more than your share of last
year's global resource production. The only reason you got away with it
is that
somebody else, actually a lot of somebody elses, used less than their
share. That, by definition, is an unsustainable long-term dynamic. The
ugly truth is we all have to change our wasteful ways because the
world's emerging economies are forcing the issue. The following cartoon
from Jan Daraz was published
in the last issue of Batteries
International and is almost too true to be funny.

The biggest challenge of our age is finding relevant scale solutions to
persistent shortages of water, food, energy and every commodity you can
imagine. The trick will be finding ways to raise the standard of living
in emerging economies without crushing our own. We
simply can't dig our way out of this hole.

I'm a strident critic of plug-in vehicles like the Nissan Leaf (NASNY.PK), the
Mitsubishi MiEV (MMTOF.PK),
the
Tesla
Roadster (TSLA)
and the GM Volt because they use pornographic amounts of highly
processed new industrial
and exotic metals to save a couple hundred gallons of gas per year.
Since it doesn't take more than a
cursory glance at the
mineral production table to see that the natural resource balance is
unsustainable, the only rational conclusion is that plug-in
vehicle business models are a catastrophe in the making for investors.

While I've occasionally been harsh with lithium-ion battery
developers like A123 Systems (AONE),
Ener1 (HEV),
Valence
Technology
(VLNC)
and
Altair
Nanotechnologies (ALTI),
my
criticisms
have focused on their fawning eagerness to support the plug-in vehicle
hysteria instead of focusing on applications that need the
size, weight and energy density benefits of their products. There's no
escaping the reality, lithium-ion
batteries
are
too valuable to waste on plug-in vehicles. The
following table summarizes potential uses for lithium-ion batteries:

Device Type

Battery
Capacity

Price
Sensitivity

Cellphones & Smartphones

5 to 10 wh

Lowest

Portable medical devices

10 to 50 wh

Very low

Laptop computers

20 to 50 wh

Low

E-bikes and scooters

500 to 1,000 wh

Moderate

HEVs

1,000 to 1,500 wh

Moderate

PHEVs

10,000 to 16,000 wh

High

BEVs

24,000 to 50,000 wh

Very high

Utility applications

500,000+ wh

Highest

Since I learned in kindergarten that one can't buy for a dime, sell for
a nickel and make it up on volume, I have a hard time understanding the
logic of a business model that's focused on customers who need a
premium product but don't want to pay a fair price. That kind of price
pressure may be a good thing for consumers, but it's never a good thing
for
stockholders of battery manufacturers.

In an effort to milk the plug-in vehicle exuberance for all it's
worth, many lithium-ion battery developers wax
prophetic on how great things will be once they finish their
R&D, build their factories, slash their
production costs, find customers that aren't insolvent or teetering on
the brink and show Asia how to manufacture efficiently. Until these
companies accept their own limitations and develop the business sense
to focus on the highest and best uses for their products,
they'll continue squandering stockholders' money chasing pipe
dreams.

I'm a big fan of lead-acid batteries because the raw materials
typically come from recycled batteries and offer a sensible balance
between conservation
and
sustainability. In other words, they're cheap and plentiful. Lead-acid
may not be the best
technology for all uses, and it certainly won't work in cellphones and
other devices where size and weight are mission critical constraints,
but for mundane storage applications where costs and benefits
matter, lead-acid and perhaps molten salt are the only battery
technologies that have a chance of
success.

Notwithstanding disparaging gossip that compares the best lithium-ion
batteries with ordinary starter batteries,
the lead-acid sector has experienced a renaissance over the last few
years as new manufacturing methods and materials were used to enhance
vintage technology. There's no way around the
size and weight limitations, but gains in energy, power and cycle
life for the best lead-acid batteries have been impressive. As a result
today's advanced lead-acid batteries bear little or no resemblance to
common starter batteries and offer extraordinary price performance when
compared with other advanced batteries.

Despite impressive product performance gains, the leading lead-acid
battery manufacturers like Enersys (ENS),
Exide Technologies (XIDE)
and C&D Technologies (CHP),
along with advanced technology developers like Axion Power (AXPW.OB),
trade
at
a fraction of the valuations for their riskier cousins. Over the next
few
quarters the valuation disparities will become painfully obvious as
growth rates the lead-acid sector soar while the
lithium-ion sector stagnates.

Like many observers, I believe these turbulent times are the dawn of
the Age
of
Cleantech,
the sixth industrial revolution. I also put a lot of
stock in Ray
Kurzweil's
theory that "we won't experience 100 years of progress
in the 21st century—it will be more like 20,000 years of progress."
Notwithstanding a firm conviction that we're entering a new age, I'm
painfully aware that technology alone cannot change
resource production constraints, it cannot change population growth,
it cannot change the human desire for something better and it cannot
change the laws of chemistry. Unfortunately, investors
who believe that Moore's Law and the other rules we learned during the
IT revolution apply to cleantech are in for a very rude awakening.

The one factor that makes the cleantech revolution different from all
its predecessors is the unbridled arrogance of policy wonks who don't
understand things like resource constraints and sincerely believe they
can control the
direction and pace of technological development by spending money
on the pet projects of
ideologues. A brief history of the serial failures of our technology du jour energy policy
follows:

25 years ago

Methanol

15 years ago

Electric Vehicles

10 years ago

HEVs and Electric Vehicles

5 years ago

Hydrogen Fuel Cells

3 years ago

Ethanol and Biofuels

Today

Plug-in Vehicles

2012

Whither bloweth the wind?

The Spanish poet and philosopher George Santayana
wrote, "Those who cannot remember the past are condemned to repeat it."
The government's track record of picking energy technology winners currently
stands at 0 for 5.
Any questions?

Disclosure: Author is a former
director of Axion Power International and holds a substantial long
position in its stock.

Comments

How low can it go: Axion keeps going down, down, down. The scary things is, I don't know why. Are the company's stock sales and the withdrawal of Quercus Trust (I think they've stepped away) to blame? Or is it the excitement over electric vehicles, i.e., Tesla-Toyota partnership, the Nissan Leaf? Or maybe difficulty in U.S. Congress of passing an energy bill that would favor renewables? I realize that all stocks have an element of the unknown, but early-stage companies like Axion are especially hard to read. Who knows, it might be a good time to buy MORE stock???

I watch the market pretty carefully and for the past several months we had a single market maker pushing and shoving on the offer all day every day. That only happens when a single seller is responsible for the volume because if it was many sellers, the market makers would move around.

Last December there was a big private placement at $0.57. The bulk of the offering was bought by institutions like Blackrock but there were some smaller purchasers. It wouldn't surprise me to see a couple of those smaller purchasers decide that they'd rather redeploy their money in something with more action.

I've not heard or seen anything that tells me there's anything wrong. Since the current offer is the same price Blackrock paid to buy almost 8 million shares, there are some who might view the current market as an opportunity.

I've been doing small company work for my entire career and learned that the identity of sellers never matters because once they're out of stock they're irrelevant. Since there doesn't seem to be any shortage of buyers, I'm not concerned. I'm not happy, but I'm not concerned.